Saturday, February 28, 2009

Since its enactment, the "Graves Amendment" has provided vehicle lessors and renters with a statutory basis for dismissing vicarious liability claims in motor vehicle accident lawsuits. The New York courts have previously held that the Graves Amendment only applies to actions commenced by the filing of the initial summons and complaint after its August 10, 2005, enactment date, and does not bar vicarious liability claims against vehicle lessors asserted in amended pleadings in actions commenced prior to that date. See, Jones v Bill, 10 NY3d 550 (2008); Tirado v ELRAC Inc., 54 AD3d 261 (3rd Dept. 2008).

New York Vehicle and Traffic Law § 388 provides that "[e]very owner of a vehicle . . . shall be liable and responsible for death or injuries to person or property resulting from negligence in the use or operation of such vehicle, in the business of such owner or otherwise, by any person using or operating the same with the permission, express or implied, of such owner."

In pertinent part, the Graves Amendment provides:

§ 30106. Rented or leased motor vehicle safety responsibility(a) In general. An owner of a motor vehicle that rents or leases the vehicle to a person (or an affiliate of the owner) shall not be liable under the law of any State or political subdivision thereof, by reason of being the owner of the vehicle (or an affiliate of the owner), for harm to persons or property that results or arises out of the use, operation, or possession of the vehicle during the period of the rental or lease, if: (1) the owner (or an affiliate of the owner) is engaged in the trade or business of renting or leasing motor vehicles; and(2) there is no negligence or criminal wrongdoing on the part of the owner (or an affiliate of the owner).

In this case, plaintiff learned during the deposition of the offending driver taken more than three years after the accident that the offending vehicle was a leased vehicle, and that Chase Manhattan Automotive Finance Corp. (now known as Chase Auto Finance Corp.) was the lessor. Plaintiff moved for leave to serve a supplemental summons and amended complaint adding Chase as a party defendant, and Suffolk Supreme denied that motion based on its conclusion that such a supplemental claim could not be made after August 10, 2005 effective date of the Graves Amendment.

The Second Department AFFIRMED but for a different reason. While acknowledging that the Graves Amendment does not bar vicarious liability claims against vehicle lessors asserted in amended pleadings in actions originally commenced prior to its effective date, the Second Department found that plaintiff's claim against Chase was barred by the applicable three-year statute of limitations:

The plaintiffs argue that the claim against Chase relates back to the timely-commenced action against the operator of the offending vehicle. However, the plaintiffs failed to meet their burden of proving that the relation-back doctrine is applicable, since there is no evidence that Chase knew or should have known that, but for a mistake on the part of the plaintiff, it would have been named in the action as well (see, Buran v Coupal, 87 NY2d 173 [1995]). Indeed, there is no evidence that Chase was aware of the accident, much less the lawsuit, within the limitations period (see Williams v Majewski, 291 AD2d 816 [2002]; compare Porter v Annabi, 38 AD3d 869 [2007]). Since notice within the limitations period is "the 'linchpin' of the relation back doctrine" (Buran v Coupal, 87 NY2d 173, 180 [1995]), the denial of the plaintiffs' motion for leave to serve a supplemental summons and amended complaint adding Chase as a defendant to the action was correct.

Thus, before the relation back doctrine under CPLR § 203 may be invoked to permit an otherwise time-barred claim, the plaintiff must demonstrate that:

(1) both claims arose out of same conduct, transaction or occurrence;

(2) the new party is "united in interest" with the original defendant, and by reason of that relationship can be charged with such notice of the institution of the action that he will not be prejudiced in maintaining an action on the merits; and

(3) the new party knew or should have known that, but for an excusable mistake by plaintiff as to the identity of the proper parties, the action would have been brought against him as well.

In this case, plaintiff did not demonstrate the third condition -- that Chase knew of should have known, but for the plaintiff's mistake not suing the vehicle's actual owner, that this action would have been brought against it, as well. Graves Amendment did not apply, but the statute of limitations did.

To read most posts about New York cases involving the Graves Amendment, click here.

Tuesday, February 24, 2009

Here on the east coast, most people probably don't know or don't care that their property insurance policies -- both commercial and personal lines policies -- exclude coverage for losses due to earthquakes. The HO-3 (10/00 edition), for example, provides:

SECTION I – EXCLUSIONS

A. We do not provide insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

2. Earth Movement

Earth movement means:

a. Earthquake, including land shock waves or tremors before, during or after a volcanic eruption;

caused by or resulting from human or animal forces or any act of nature unless direct loss by fire or explosion ensues and then we will pay only for the ensuing loss.

Even with its "anti-concurrent causation" prefatory language, I, myself, never considered the earthquake exclusion to be of any potential consequence to the financial security of my home and contents. Until yesterday.

Some of you may have heard about the trio of "micro" earthquakes that hit central and north New Jersey residents earlier this month ranging from 2.3 to 3.0 in magnitude. According to the New York Times, no damage or injuries were reported after any of the three. Quoting Dr. Won-Young Kim, director of the Northeast Seismic Network and a senior scientist at the Lamont-Doherty Earth Observatory, in Palisades, NY, the Times reported: “I don’t think people should worry,” he said. “Earthquakes are not unexpected here. It’s just an indication that Planet Earth is evolving.” The New York Times' Science Section includes a topic on earthquakes, with many informational links.

In keeping with its particular journalistic tack, the New York Post reported the New Jersey quakes in a different, more alarming way, predicting that "[t]he Big Apple is due for the Big One" and claiming that unnamed seismologists call the geological fault lines crisscrossing Manhattan "a perfect storm for a temblor that could topple older buildings, cause billions of dollars in damages and kill people citywide." The Post article states:

The city should expect a jolt like that last one every 100 years, the experts warn - which means we're overdue. Jersey's recent baby quakes, which caused no damage and failed to rise above 3.0 in magnitude, may have been warning shots, they say.

A 6.0-magnitude quake could cause as much as $200 billion in damages, according to a 2003 study by the New York City Area Consortium for Earthquake Loss Mitigation.

People and businesses in California know that earthquake coverage is available for purchase under separate, coverage-specific policies through the California Earthquake Authority. Is earthquake coverage available here in New York? I don't know, since I've never asked. Back in 2006, AP Online reported that Allstate was dropping earthquake insurance to most of its 407,000 quake customers nationwide as a part of a larger move to reduce exposure to catastrophic losses, but would still be renewing earthquake coverage in New Hampshire, New York, and Pennsylvania. Will I ask about earthquake coverage? Probably, if only to satisfy my curiosity to know. If any agents or brokers who read this blog would like to comment on the availability and approximate cost of such coverage, please do.

Those who live and work in the metropolitan New York City area, have you made any preparations for "the Great New York Earthquake"? Something to think about. Not that we all don't have enough to think about right now in these economically quaking and crumbling times. With insureds reported to be canceling or reducing insurance coverages to save money, I don't see there being a rush on buying earthquake policies. Just please don't be surprised to learn that your homeowners or businessowners policy doesn't cover earthquake related damage if it does occur.

Monday, February 23, 2009

The LexisNexis Insurance Law Center is now receiving nominations for the Center’s “Insurance Law Persons of the Year” award. The award, like similar awards in other fields, seeks to identify and recognize people who have been a major force in the insurance law during the preceding year. We anticipate that the awards will continue to be given each year. The Insurance Law Center will select the following:

Policyholder Attorney of the Year – the attorney who did the most in 2008 to effectively advance policyholder positions and improve insurance law from the perspective of policyholders.

Insurer Attorney of the Year -- the attorney who did the most in 2008 to effectively advance insurer positions and improve insurance law from the perspective of insurers.

Insurance Regulator of the Year – the international, federal, state, or local regulator who had most impact during 2008.

Insurance Jurist of the Year -- the judge or justice whose rulings had the largest impact on insurance law during 2008.

Recipients in each of the four categories should be someone who has had a substantial impact on the legal aspects of insurance. Although company executives are not ineligible for the award, our focus is not so much on insurance business and finance but upon insurance regulation, litigation, coverage, or other matters of law or legal policy. Consequently, the recipient in each of these four categories should be someone whose contributions are primarily in the area of insurance law rather than risk management, product design, marketing, or management.

As with Time magazine’s better-known, longer-running person of the year award, the winner need not be universally viewed in a positive light by all members of the insurance law community. Recognizing that there are often substantial differences between policyholder and insurer counsel and judges or regulators with different philosophies, we would expect that in some years the award winners in these categories may be someone with whom others strongly disagree regarding certain issues. The criteria for selection is that each recipient has, within his or her category, had an undeniable impact on insurance law during the year in question.

Nominations will be considered by the Lexis Insurance Center Board, which plans on releasing a list of finalists and inviting commentary from visitors to the Center’s website. Informed by (but not bound by) commentary, the Board will make the final selection of the Insurance Law Center’s Person of the Year.

So, please send your nominations to karen.yotis@lexisnexis.comno later than March 1, 2009 and be on the lookout for announcement of the finalists and a chance to participate in the selection process. We anticipate choosing the 2008 Person of the Year by March 15, 2009.

No, I'm not posting this because I want your nominations. I'm posting this announcement because Karen Yotis, editor of the LN Insurance Law Center, asked me to. If you know someone worthy of nomination, please email Karen.

I've created and added a number of links to the New York Insurance Resources list on the right toolbar of this page, just beneath the blawg roll. If you have any suggestions for other links, please let me know in a comment to this post.

Circular Letter No. 9 (2002), issued April 9, 2002, provided guidance to insurers and self-insurers in implementing a revised no-fault insurance regulation, 11 NYCRR Pt 65 (Regulation 68), which took effect on April 5, 2002. The Circular Letter advised of a new time limit for providing notice of a motor vehicle accident to an insurer or self-insurer, and provided guidance to insurers and self-insurers for establishing standards for excusing late notice where there is clear and reasonable justification for the failure to comply with the required timeframe.

The purpose of this Circular Letter is to remind insurers and self-insurers of their obligations with respect to the notice of claim provisions set forth in 11 NYCRR § 65-3.3, and to provide further guidance with regard to those requirements.

NYS Form NF-2 Submission
Regulation 68 does not establish a required time frame in which a claimant must return an NF-2 form to an insurer. 11 NYCRR § 65-3.3(e) permits an insurer to issue a denial for failure to provide timely written notice of claim within 30 days of the accident. However, as noted in the June 2, 2008 opinion of the Department’s Office of General Counsel (“OGC”) (OGC Op. No. 08-06-01), neither the Insurance Law nor the regulations promulgated thereunder authorize an insurer to issue a denial on the ground that the claimant failed to return a completed NF-2 to the insurer when the claimant has otherwise submitted timely written notice within 30 days of the accident in accordance with 11 NYCRR § 65-1.1.

Satisfaction of Written Notice
11 NYCRR § 65-3.3(d) allows for satisfaction of the written notice requirement through the insurer’s receipt of an NF-2 or completed hospital facility form (NYS Form NF-5). But the written notice requirement may be satisfied in other ways as well. Indeed, 11 NYCRR § 65-3.3(c) provides that the receipt by an insurer of a Department of Motor Vehicles Accident Report 104 (MV-104) or other accident report indicating injuries to an eligible injured person shall satisfy the written notice requirement. Further, pursuant to 11 NYCRR § 65-3.5(g), an insurer must accept a completed hospital facility form (NYS Form NF-5) submitted on behalf of a provider of health services in lieu of a prescribed NF-2.

Standards for Excusing Late Notice of Claim
In accordance with 11 NYCRR § 65-1.1, the 30-day written notice requirement must be excused if the claimant submits written proof of clear and reasonable justification for the failure to comply. Moreover, 11 NYCRR § 65-3.5(l) requires insurers to establish standards for review of determinations where an applicant has provided late notice of claim. Such standards must be available for review upon request by Department examiners.

Self-Insurers
All of the aforementioned notice regulatory provisions apply equally to self-insurers, as set forth in 11 NYCRR § 65-2-4.

Additional Requirements
Insurers also are reminded that in accordance with 11 NYCRR § 65-3.2(g), insurer personnel responsible for the handling and settlement of claims must be thoroughly familiar with the provisions of Regulation 68. Insurers should review their claims handling procedures to ensure that their processes conform to Regulation 68.

Please direct any questions or comments regarding the contents of this Circular Letter to:

American Motorists commenced this subrogation action to recover amounts paid to its insured, Advanced Fertility Services, P.C., for damages sustained as the result of a water leak/moisture condition occurring in office space leased by Advanced in a building owned by Yorkville Towers Housing Co. and managed by R.Y. Management Co., Inc., located at 1625 Third Avenue in New York, New York. Advanced, which had operated a fertility clinic in the leased space since 1985, was forced to suspend its business as the result of the water condition and associated mold problem, which was discovered on July 14, 2002. At the time, Advanced was insured under a “Kemper Premier Business Owners Special Policy” issued by American Motorists and procured by Advanced through the Keep Insurance Agency. As a result of the loss, American Motorists paid Advanced $459,000 for property damage, $944,000 for business interruption, and an “Extra Expense” of $30,00 for mold removal. In addition to this subrogation action, American Motorists also commenced a separate action against Keep in Westchester County Supreme Court for negligence and breach of contract claiming that Keep provided the subject policy to Advanced despite Advanced’s ineligibility for coverage. By order dated March 14,2008 in that case, the court granted American Motorists' motion for summary judgment against Keep on the issue of liability.

Yorkville and RY moved for summary judgment based on a waiver of subrogation provision in the lease between Advanced and Yorkville, which provided:

9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of the Owner and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. . .(d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casualty, or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease. . .(e) Nothing contained hereinabove shall relieve tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, including Owner’s obligation to restore under subparagraph (b) above, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and tenant hereby releases and waives all right of recovery with respect to subparagraphs (b), (d), and (e) above, against the other or anyone claiming through or under each of them by way of subrogation or otherwise. The release and waiver herein referred to shall be deemed to include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and merchandise located therein. The foregoing release and waiver shall be in force only if both releasors’ insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance.

The insurance policies issued to both Advanced and Yorkville each contained an identical subrogation provision:

If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after loss to impair them. But you may waive your rights against another party in writing:

1. Prior to a loss to your Covered Property[.]

This will not restrict your insurance.

In opposition to Yorkville's and RY's motion, American Motorist argued that the lease provides a waiver and release of recovery only “with respect to subparagraphs (b), (d), and (e)” of paragraph 9, which American Motorists contended related to damages incurred as the result of a loss "to the demised premises.” American Motorists asserted that it was not seeking to recover for a loss to the demised premises but rather for fixtures, personalty and business interruption. In rejecting that argument, Kings County Supreme Court Justice Martin Solomon ruled:

While the subparagraphs mentioned only refer to a loss to the “demised premises” the terms of paragraph 9 expressly state that the waiver and release “herein referred to shall be deemed to include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and merchandise located therein.” Thus the waiver clearly applies to the losses suffered by Advanced.

American Motorists also argued that the subrogation provision did not apply to Yorkville’s property manager, RY, since the provision refers only to “Owner” and “Tenant.” Justice Soloman rejected that argument, as well, holding:

However, the lease’s provision regarding property loss and damage (paragraph 8), as well as the provision which confers a right of entry to the leased space to make repairs (paragraph 13) is expressly applicable to “Owner” and its “agents.” Therefore, a reading of the lease, as a whole, demonstrates that where issues involving the condition of the leased property or damages thereto are concerned, it was the intent of the parties that RY be deemed of equal status to the “Owner,” and the lease must be interpreted to afford equal protection under the subrogation clause to RY (see Insurance Co. of North America v Borsdorff Services, Inc., 225 AD2d 494 [ 19961; Pilsener Bottling Co. v Sunset Park Indus. Assocs., 201 AD2d 548 [1994]).

Finally, the court distinguished this matter from the facts in Continental Ins. Co. v 115-123 West 29th Street Owners Corp. (275 AD2d 604 [2000]), in which the waiver of subrogation clause in the lease at issue in that case required that the lessee's insurance policy "contain a waiver of subrogation provision against the Landlord". The Continental court interpreted the lease provision strictly according to its terms and determined that since the relevant insurance policy did not “contain a waiver of subrogation against the Landlord,” but rather simply authorized the insured to waive its rights against another in writing, the release set forth in the lease was ineffective by its own terms. In distinguishing that lease provision from the one between Advanced and Yorkville, Justice Soloman noted:

The lease relevant to the matter at bar contains no such limitation, but provides that the “release and waiver shall be in force only if both releasors’ insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance.” Both insurance policies at issue contain a clause that waiver of subrogation “will not restrict” each party’s insurance, which this court interprets to mean that the insurance will not be invalidated by waiver of subrogation.

In light of the court's holding that the waiver of subrogation clause of the lease precluded American Motorists' subrogation action against Yorkville and RY, the court did not reach as academic those defendants' alternative argument that the American Motorists would be made whole by its judgment against the producing agent, Keep.

For more waiver of subrogation cases, click here or the waiver of subrogation label below.

(a) All overdue mandatory and additional personal injury protection benefits due an applicant or assignee shall bear interest at a rate of two percent per month, calculated on a pro rata basis using a 30-day month. When payment is made on an overdue claim, any interest calculated to be due in an amount exceeding $5 shall be paid to the applicant or the applicant’s assignee without demand therefor.

(c) If an applicant does not request arbitration or institute a lawsuit within 30 days after the receipt of a denial of claim form or payment of benefits calculated pursuant to Insurance Department regulations, interest shall not accumulate on the disputed claim or element of claim until such action is taken. If any applicant is a member of a class in a class action brought for payment of benefits, but is not a named party, interest shall not accumulate on the disputed claim or element of claim until a class which includes such applicant is certified by court order, or such benefits are authorized in that action by Appellate Court decision, whichever is earlier.

At issue in this case, as in many lower court cases before it, was whether the term "applicant" as used in subdivision (c) of this interest tolling regulation applies only to eligible injured persons or to their medical provider assignees, as well. Resolving conflicting decisions in New York trial courts, and AFFIRMING the Appellate Term's 2007 decision, Second Department ruled that the term "applicant," as used in 11 NYCRR 65-3.9(c), refers to both provider/assignees and injured persons and that the toll on statutory interest provided for therein applies to no-fault claims submitted to insurers by both types of claimants.

In agreeing with the Appellate Term's decision, the Second Department held:

(1) the Insurance Superintendent's interpretation of the term "applicant" in 11 NYCRR 65-3.9(c) as referring to both provider/assignees and injured persons is neither irrational nor unreasonable and, as such, is entitled to deference;

(2) the Superintendent's interpretation conforms with the general principle that an assignee stands in the shoes of an assignor and thus acquires no greater rights than those of its assignor; and

(3) East Acupuncture's reliance upon LMK Psychological Servs., P.C. v State Farm Mut. Auto. Ins. Co. (46 AD3d 1290, 1291-1292, lv granted 10 NY3d 717) and New York & Presbyt. Hosp. v Allstate Ins. Co. (30 AD3d at 494) was misplaced because the Third Department in those cases did not address the precise issue presented by this appeal: whether the term "applicant," as used in 11 NYCRR 65-3.9(c), refers to both injured persons and provider/assignees.

The Second Department reasoned and concluded:

Applying these principles to the matter at bar, we find that the term "applicant" as used in 11 NYCRR 65-3.9(c) refers to both provider/assignees and injured persons. Since the Superintendent's parallel interpretation is neither irrational nor unreasonable, it is entitled to deference (see Matter of 427 W. 51st St. Owners Corp. v Division of Hous. & Community Renewal, 3 NY3d at 342; Matter of Visiting Nurse Serv. of N.Y. Home Care v New York State Dept. of Health, 5 NY3d at 506). In light of the fact that the no-fault regulations do not provide a general definition of the term "applicant," the plain meaning of this term in 11 NYCRR 65-3.9(c) would seem to refer to any entity, whether an injured person or a provider/assignee, who submits a claim or applies to an insurance company for no-fault benefits (see Majewski, 91 NY2d at 583). Indeed, in some instances, these regulations use the term "applicant" as a generic reference to both provider/assignees and injured persons (see e.g. 11 NYCRR 65-3.2[b], 65-3.3[a], 65-4.2[b][1][I]); while, in other instances, the term "applicant" is used to refer specifically to injured persons (see e.g. 11 NYCRR 65-3.5[e], 65-3.8[g]). However, construing the no-fault regulations as a whole and considering their various sections in reference to each other, as we must (see People v Mobil Oil Corp., 48 NY2d at 199), the Superintendent's interpretation of the term "applicant," as used in 11 NYCRR 65-3.9(c), as a generic reference to both provider/assignees and injured persons is entitled to deference not only because the no-fault regulations do not use this term consistently and exclusively as a reference to injured persons, but because the Superintendent's definition is consistent with the manner in which it is used in certain other instances.

The Superintendent's interpretation of 11 NYCRR 65-3.9(c) is additionally consistent with the spirit and purpose of the No-Fault Law (see generally Matter of ATM One v Landaverde, 2 NY3d at 477). One of the primary aims of the no-fault system is to ensure prompt payment of claims (see Matter of Medical Socy. of State of N.Y. v Serio, 100 NY2d at 860; Cardinell v Allstate Ins. Co., 302 AD2d at 774). The interest which accrues on overdue no-fault benefits at a rate of two percent per month (see Insurance Law § 5106[a]; 11 NYCRR 65-3.9[a]) is a statutory penalty designed to encourage prompt adjustments of claims and inflict a punitive economic sanction on those insurers who do not comply (see Dermatossian v New York City Tr. Auth., 67 NY2d 219, 224; Cardinell v Allstate Ins. Co., 302 AD2d at 774). Interpreting 11 NYCRR 65-3.9(c) as applying the interest toll only to injured persons would allow a provider/assignee, who delays commencing legal action or requesting arbitration on denied claims, to continue to accrue interest pursuant to Insurance Law § 5106(a) throughout this period of delay. Rewarding such delay with what amounts to essentially a windfall of punitive interest payments is at odds with the legislative goal of promptly resolving no-fault claims.

* * * * *

In conclusion, we hold that the term "applicant," as used in 11 NYCRR 65-3.9(c), refers to both provider/assignees and injured persons and that the toll on statutory interest provided for therein applies to no-fault claims submitted to insurers by both types of claimants. Accordingly, the Appellate Term properly determined that interest pursuant to Insurance Law § 5106(a) did not begin to accrue on the claims that were untimely denied by Allstate until East Acupuncture filed its complaint. Thus, the Appellate Term properly reversed the order of the Civil Court and remitted the matter for the new interest calculation.

Medical providers likely will continue to argue that this ruling is at odds with the Third Department's holding in LMK Psychological Servs., P.C. v State Farm Mut. Auto. Ins. Co. Suits within the Second Department will, however, be subject to this ruling. It remains to be seen whether East Acupuncture will seek leave to appeal this decision to the Court of Appeals or simply wait to see what that court does with the interest issue when deciding State Farm's appeal in LMK. With much if not most of New York's no-fault litigation occurring within the Second Department, medical providers may want the Court of Appeals to address this issue. If the Court of Appeals does little or nothing with the tolling issue in LMK, there may be more of a possible upside than downside at that point in appealing, if permitted.

Thursday, February 19, 2009

The New York State Insurance Department has released the report of its investigation dating back to May 2007 regarding automobile insurer's compliance with New York Insurance Law § 2610, New York's "anti-steering statute", which provides:

(a) Whenever a motor vehicle collision or comprehensive loss shall have been suffered by an insured, no insurer providing collision or comprehensive coverage therefore shall require that repairs be made to such vehicle in a particular place or shop or by a particular concern.

(b) In processing any such claim (other than a claim solely involving window glass), the insurer shall not, unless expressly requested by the insured, recommend or suggest repairs be made to such vehicle in a particular place or shop or by a particular concern.

The Insurance Department conducted its investigation in three phases:

Phase One entailed a review of controls that insurers have put in place to ensure for compliance with Section 2610 and review of insurer tapes and file notes from a business day selected at random.

Phase Two consisted of an on-site review of randomly sampled tapes and file notes of two insurers.

Phase Three consisted of a review of all complaints filed with the Department's Consumer Services Bureau (CSB) related to alleged violations of Section 2610.

Inquiries and examinations were made of the conduct of 12 auto insurance companies or sets of companies, identified by letter only, and the report details the Department's findings in each of the three phases, concluding overall:

CSB’s review did not reveal any systemic violation of Section 2610. Nevertheless, insurers should be vigilant and take steps to clearly inform insureds that they have a right to choose the location for both the inspection and repair of the damaged vehicle. Further, insurers should take all necessary measures to assure that their claim representatives do not recommend a repair facility unless requested by the insured.

Wednesday, February 18, 2009

One of the pluses of practicing insurance coverage and fraud law is learning new things. Like yesterday. A claim rep from a major auto insurer called and told me that their insured had "rented" her personal auto from the metropolitan New York City area to a woman from California, who drove to Maryland to pick up her fiancé (at least, that was her story and she's sticking to it) and became involved in a two-car accident, causing physical damage to the insured vehicle, property damage to the other vehicle and injuries to the other vehicle's occupants. How did the California driver find the NYC insured? Craigslist. That's right. Craigslist.

How much money will I make?You decide how much you want to make by setting your own daily, weekly and monthly rate. The lower the rate the more often your car will be rented.

Will my insurance allow someone else to drive my car?Yes, [Really? You auto insurers out there would be okay with this?] however they may not cover the driver for collision and other liabilities. [This is true.] Jolly Wheels pre-qualifies all renters for insurance coverage that will carry over to your car. [And exactly what coverages would those be that "carry over" to the owner's car?]

What happens if a renter wrecks my car?The renter or the renters insurance will pay for it. [WRONG, even if the driver has insurance, the rented vehicle will be a non-owned auto to the driver; if there is coverage available, it will likely be excess to the owner's insurance.] Jolly Wheels pre-qualifies all renters for insurance coverage that will carry over to your car.

Will I ever meet the customers?Yes. Jolly Wheels will find and pre-qualify [using Fannie Mae mortgage qualification criteria no doubt] renters in your area. Both you and the renter will be given each others phone numbers, and will make your own arrangements for picking up and dropping off [the car, silly].

How do I get paid?Cash on delivery and Paypal is our preference. [Of course it is.] However check and money order are also available.

What am I responsible for?Keeping your vehicle registered, insured and inspected. Following through with your pick up and drop off arrangements. [And answering own insurance company's many questions in the event of an accident or loss.]

And if losses do occur and you have questions regarding the motor vehicle or insurance laws in other states, Martindale-Hubbell state law digests are now available online for free via Martindale.com’s advanced search page. Enter “Law Digest” in the box marked “Keywords to search for:” and then the relevant state under the “Jurisdiction Search” section. Anyone using this website will need to register the first time. It’s free.

Now where did I save my craigslist username and password? Anyone need a 2008 Tahoe for the weekend?

Plaintiff sued its customer presumably for the recovery of its contingent public adjusters' compensation fee. At a non-jury trial of this action, plaintiff submitted its contract with the defendant, which prominently bore plaintiff's corporate license number PA-873158, and plaintiff's vice-president testified that that plaintiff was a "New York Limited" liability corporation. The Richmond Civil trial judge mistook the PA- prefix in plaintiff's license number as meaning that plaintiff was licensed in Pennsylvania and not New York and dismissed the action. The PA- prefix, however, meant public adjuster, not Pennsylvania.

The Appellate Term reversed and ordered a new trial, holding that "[t]here was no basis whatsoever in the record for the court's conclusion that plaintiff was not licensed in New York."

On the retrial, plaintiff would be well served to bring a copy of its actual New York adjusting license and study up on what "Ltd." means. Know thyself.

Monday, February 16, 2009

If this were a post just about the timeliness of a late notice disclaimer issued 13-days after first notice, it'd be a short one. Heck, I could tweet it in 140 characters or less (and did, as a matter of fact).

No, this post is more about one of the challenges that both property and liability insurers face in litigating insurance coverage disputes: getting trial courts to stay the trial of the dispute long enough to prosecute an appeal of a dispositive legal issue.

Trial judges and their law clerks do what they can to manage their sizable dockets. I understand and don't begrudge them that. Cases come off dockets in one of three ways: (1) on dispositive motion; (2) by settlement or discontinuance; or (3) after trial. Judges and their clerks understand the economics of trying insurance coverage disputes (a/k/a expense in ratio to uncertainty of result) almost as well as insurers themselves do. Judges also understand, no doubt from past experience, whether active or passive, that a looming trial tends to facilitate settlement of such disputes. Fair or not, scheduling a quick trial or refusing to stay one to allow the insurer to prosecute an appeal, promotes settlement in many cases. Cases that then come off judges' dockets and free up their calendars. To busy litigators and judges, found time can be better than found money.

As a coverage litigator, I've encountered this situation a number of times -- summary judgment denied with a scheduled trial date in fewer months than an appeal can be perfected, argued and decided. More times than not, the trial judges have been unwilling to stay the trial to allow for the completion of an appeal even where, as in most cases, there would be little if any prejudice to the insured if the trial were delayed. Why is that? Why should trial judges care if the appeal goes first? The most probable reason is leverage. To leverage a settlement of the action.

Although this dynamic applies more readily to first-party than third-party coverage disputes, liability insurers are not immune from such economic pressure. My office recently completed a relatively expensive week-long trial of a declaratory judgment action and is a few weeks away from oral argument of the pre-trial denial of our client's motion for summary judgment. The trial judge refused to stay the trial, and our client did not want us to make a formal motion to either the trial judge of Appellate Division. No automatic stay provision of CPLR 5519 applied, and a trial is not a proceeding to enforce an order denying summary judgment, per subdivision (c). We now have two appeals pending -- one from the summary judgment motion denial; and one from the trial judgment. Yes, the jury found against our client at trial, but given who the insured (a church) and venue (a rural, conservative county) were, we knew going in that our best chance of prevailing in that case was on motion, not at trial.

Cut back to the captioned case. From eCourts we learn that this action was brought in August 2006 against State Farm pursuant to New York Insurance Law § 3420(a)(2) and (b)(1) to enforce a $150,000 default judgment that was granted against State Farm's insured, Jose Rodriguez, on February 9, 2006 for injuries the plaintiff allegedly had sustained in a motor vehicle accident on June 30, 2001. State Farm received first notice of the accident on December 14, 2004 (more than three years after the accident date, presumably in relation to the underlying Roules v. Rodriguez action) and disclaimed coverage to Mr. Rodriguez under his auto policy based on late notice on December 27, 2004, 13 days later.

After obtaining the default judgment, Roules sued State Farm, contending that its denial of coverage to Rodriguez was wrongful. State Farm moved for summary judgment, which was denied, the motion court holding in August 2008 that "whether the service of the disclaimer in this action was timely, remains an issue of fact." State Farm appealed.

CPLR 2201 provides:

Stay

Except where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just.

In this case, it appears State Farm made a motion to stay the trial of this 3420(a)(2) judgment-creditor's enforcement action directly to the Appellate Division, Second Department, which, without opposition from the plaintiff-respondent, the Second Department granted on October 30, 2008 "pending hearing and determination of [State Farm's] appeal." Neither the eCourts' appearance listing nor the Second Department's memorandum decision reveals when the trial of the action had been scheduled.

Last week, the Second Department issued its decision on State Farm's appeal. Not surprisingly, at least not to me, the court ruled that "[c]ontrary to the determination of the Supreme Court, the timeliness of the disclaimer issued by the defendant State Farm ... did not present an issue of fact":

Would the Second Department have been less likely to grant State Farm's motion for a stay of the trial had the plaintiff-respondent opposed that motion? Perhaps. Regardless, I submit that more trial and appellate courts should exercise their discretion under CPLR 2201 to grant stays of trials in insurance coverage cases where the insured or judgment creditor will suffer little or no prejudice from a delay of mere months to permit an appeal to be perfected, argued and decided. It's not that I don't understand how the litigation game is played in cases such as this with judges who apply pressure on insurers to settle and forgo their appeals. I don't have to like it, though.

As part of the State's Deficit Reduction Plan, Chapters 1 and 2 of the Laws of 2009 were signed into law by Governor Paterson on February 4, 2009. Those provisions increase the Insurance Department's appropriation by $180 million, and authorize the Superintendent of Insurance to assess domestic insurers for the total value of the enacted appropriation for fiscal year 2008-09. The enacted appropriation for the fiscal year ending March 31, 2009 is $443.0 million. Accordingly, as mandated by the legislation, the Superintendent is required to impose an additional assessment on domestic insurers. Pursuant to Section 18 of the State Finance Law, payment is due within 30 days of receipt of the bill. The Department will consider late any payment postmarked after March 13, 2009, and may assess late penalties accordingly.

David Christa Construction hired Spring Lake Excavating to work on a construction project at Cornell University. A Spring Lake employee was injured during that project and brought a Labor Law and negligence suit against Christa, which impleaded Spring Lake. The commercial general liability insurance configuration was as follows:

Owner

CornellUniversity

General Contractor

David Christa Construction

United Pacific Insurance Company (Reliance)

Subcontractor

SpringLake Excavating

American Home Assurance Company

Spring Lake's CGL policy with American Home included as an "[a]dditional [a]ssured" any organization to which Spring Lake "agreed, by written contract, to provide coverage, but only with respect to operations performed by or on behalf of" Spring Lake. For reasons not apparent from the decision, American Home apparently declined to afford additional insured (AI) coverage to Christa, and both Christa and Reliance (by the NYS Superintendent of Insurance, as Reliance's ancillary receiver) commenced declaratory judgment actions, later consolidated into one, seeking to have American Home's AI coverage for Christa declared as being primary. Christa and the Superintendent unsuccessfully moved for summary judgment, the motion court finding that there was a question of fact requiring certain discovery before the matter of the priorities of insurance coverage could finally be determined. During the pendency of plaintiffs' appeals, the jury rendered a verdict against Christa and in favor of Spring Lake in the trial of Christa's third-party action against Spring Lake in the underlying action, and the court dismissed the third-party complaint.

In REVERSING the lower court's denial of summary judgment to Christa and the Superintendent, the Fourth Department declared that American Home owed primary and United Pacific owed excess liability coverage to Christa. Reiterating that "[t]he scope of insurance coverage obtained by a general contractor and subcontractor 'must be determined by the terms of the policies, not the terms of the subcontract'", the court held:

Here, the additional insured provision of defendant's policy was triggered when Spring Lake agreed in the subcontract agreement to obtain liability insurance and to list Christa as an additional insured. The well-settled definition of the term "additional insured" is "an entity enjoying the same protection as the named insured" (Pecker Iron Works of N.Y. v Traveler's Ins. Co., 99 NY2d 391, 393 [internal quotation marks omitted]). Under defendant's policy, the coverage afforded to Spring Lake was to be excess over any other insurance available to it "other than [i]nsurance that is excess" to defendant's policy. Inasmuch as Christa was an additional insured, defendant likewise was obligated to provide Christa with excess coverage unless other insurance available to Christa provided only excess, rather than primary, coverage. United's policy unambiguously provided that it was to be excess over any other insurance covering Christa and on which it was not the named insured, which would include defendant's policy. Thus, United's policy provided Christa with excess coverage over defendant's policy.

Irrespective of the priority of coverage determination, American Home argued that since the jury in the underlying action found against Christa and for Spring Lake on Christa's third-party action against Spring Lake, Christa was not entitled to defense and indemnification AI coverage under Spring Lake's policy because it could not be said that Christa's liability arose operations performed by Spring Lake. In rejecting this argument and finding that American Home was obligated to both defend and indemnify Christa notwithstanding the intervening dismissal of its third-party action against Spring Lake, the court held:

The language of defendant's additional insured provision "focuses not upon the precise cause of the accident, as defendant[] urge[s], but upon the general nature of the operation in the course of which the injury was sustained" (Consolidated Edison Co. of N.Y. v Hartford Ins. Co., 203 AD2d 83, 83). The parties do not dispute that Roosa was employed by Spring Lake and injured while performing construction work for Spring Lake. Consequently, we conclude that Roosa was injured while acting "with respect to operations performed by or on behalf of" Spring Lake and that defendant is obligated to provide coverage to Christa as an additional insured pursuant to its policy. The fact that Roosa's injury may have been caused by Christa's negligence is immaterial with respect to the issue whether Christa is covered under defendant's policy (see Tishman Constr. Corp. of N.Y. v American Mfrs. Mut. Ins. Co., 303 AD2d 323, 324; Turner Constr. Co. v Pace Plumbing Corp., 298 AD2d 146, 147; Consolidated Edison Co. of N.Y. v United States Fid. & Guar. Co., 266 AD2d 9; Lim v Atlas-Gem Erectors Co., 225 AD2d 304, 305-306).

When a court's analysis of the scope of AI coverage focuses on the nature of the operations, rather than the cause of the accident, it becomes more likely that the AI will be found entitled to both defense and indemnification coverage, regardless of the AI's negligence. AI endorsement language will dictate which of the two analyses -- nature of the operations or cause of the accident -- will be utilized in making the AI coverage determination.

Wednesday, February 11, 2009

I was not able to make the trip down the Thruway to Albany today to observe this afternoon's oral arguments in LMK Psychological Servs., P.C. v State Farm Mut. Auto. Ins. Co. (46 AD3d 1290 [3rd Dept. 2007]), but Dave Gottlieb of No-Fault Paradise will be there, as may Matt Lerner of New York Civil Law. Gottlieb will be tweeting his impressions of oral arguments on his trip back home this afternoon, and you can follow his tweets on Twitter at #NFLMK hashtag or by watching here later today. If anyone else will be there and would like to share their impressions with me, which I will then post, please give me a call. Cell (716-five seven zero-5338).

Update (February 14, 2009) -- With a full keyboard under his fingers, the recently de-bearded Dave Gottlieb over at No-Fault Paradise posted a more detailed and not 140-character limited play-by-play summary of the oral arguments at the Court of Appeals here.

At a recent meeting of insurance fraud investigators and claims representatives, I reminded the group that insurance fraud and misrepresentation can occur at three points of the fraud/misrep continuum: before the loss, during the loss, and after the loss. Before the loss fraud/misrep typically pertains to the application process, during which the insured, then as applicant, misstates facts on the application material to the insurer's acceptance of the application and underwriting of the risk. I explained to the group that unlike during and after fraud/misrep, application misrepresentation need not be intentional under New York law to warrant a rescission of the policy ab initio, or from inception.

The Fourth Department, Appellate Division, also knows this. In this case, Rutgers Casualty apparently defended a denial of coverage to the plaintiffs, its insureds, by arguing that plaintiffs' policy was void from inception by reason of the insureds' material application misrepresentations. The trial judge charged the jury that Rutgers was required to prove that those alleged misrepresentations were intentional, and the jury apparently found in favor of the insureds, prompting this appeal.

In unanimously REVERSING the judgment, the Fourth Department held:

We agree with defendant that Supreme Court committed reversible error in charging the jury that defendant was required to prove that the alleged misrepresentations made by plaintiffs on their insurance application were intentional in order to prevail on its affirmative defense, seeking to void the insurance policy. Rather, although misrepresentations made by an insured must be material, they may be innocently or unintentionally made (see Curanovic v New York Cent. Mut. Fire Ins. Co., 307 AD2d 435, 436-437; see generally Insurance Law § 3105 [a], [b]), in which event the insurance policy is void ab initio (see Precision Auto Accessories, Inc. v Utica First Ins. Co., 52 AD3d 1198, 1201, lv denied 11 NY3d 709; see also Taradena v Nationwide Mut. Ins. Co., 239 AD2d 876, 877). Thus, the court should have charged the jury that, in order to prevail on its affirmative defense, defendant was required to submit "proof concerning its underwriting practices with respect to applicants with similar circumstances" in order to meet its burden of establishing that it would not have issued the same policy had the correct information been included in the application (Campese v National Grange Mut. Ins. Co., 259 AD2d 957, 958; see Precision Auto Accessories, Inc., 52 AD3d at 1200; Curanovic, 307 AD2d at 437; see also § 3105 [c]). We cannot conclude that the error in the court's charge is harmless, and we therefore reverse the judgment and grant a new trial (see Wilson v Nationwide Mut. Ins. Co., 168 AD2d 912, lv dismissed 77 NY2d 940).

Bear in mind that the alleged misrepresentations at issue in this case were made on the insurance policy's application, not in the presentment of the claim. This holding accords with New York appellate case law and New York Insurance Law § 3105, which provides, in pertinent part:

§ 3105. Representations by the insured. (a) A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false.

(b) No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.

(c) In determining the question of materiality, evidence of the practice of the insurer which made such contract with respect to the acceptance or rejection of similar risks shall be admissible.

Also note that the salient question of materiality under New York law is not whether the insurer would have issued any policy at all to the insured had there been no application misrepresentations,but whether it would have refused to make "such contract", i.e., the very same policy for the same premium and under the same terms and conditions.

May an insurance policy that has been issued and executed on the Internet be considered a properly delivered and valid insurance contract if the insured prints the policy from the Internet on the insured’s personal computer?

Answer:

Yes. Nothing in the Insurance Law or regulations promulgated thereunder prohibits an insurance company from issuing and delivering an insurance policy to an insured via the Internet if the insured has consented to receiving electronic documents. The electronic documents must conform to applicable substantive and formatting requirements of the Insurance Law and any other applicable laws.

1. Do the notice provision amendments of Chapter 388 of the Laws of 2008 apply to claims-made policies?

2. Do the Chapter 388 notice provision amendments, which become effective on January 17, 2009, apply to policies already in effect on that date that contain a liberalization clause?

3. Do the Chapter 388 notice provision amendments to N.Y. Ins. Law § 3420(c) set forth a specific date for receipt of notice of claim by an insurer that triggers the beginning of the two-year period that determines which party has the burden of establishing insurer prejudice due to failure to provide timely notice to the insurer?

Answers:

1. Yes. The Chapter 388 notice provision amendments apply to claims-made policies, but allow for a claims-made policy to provide that the claim must be made during the policy period, any renewal thereof, or any extended reporting period, subject to Insurance Law § 3420(a)(4).

2. As a general matter, liberalization clauses typically apply to coverage and not policy conditions, but may be subject to the Chapter 388 notice provision amendments depending on the specific language in the policy endorsement.

3. No. The date of receipt of notice of claim that triggers the beginning of the two-year period that determines which party has the burden of establishing insurer prejudice due to failure to provide timely notice to the insurer is set forth in the specific language of each policy endorsement.

1. May an insurer cancel an assigned risk policy that is subject to a premium finance agreement at the behest of a producer because the insured’s check, which was deposited in the producer’s premium account, was dishonored by the bank upon which it was drawn?

2. To whom must the insurer return the canceled policy’s unearned premium?

Answers:

1. Yes. An insurer may cancel an assigned risk policy that is subject to a premium finance agreement at the behest of a producer that requests cancellation in accordance with New York Auto Insurance Plan (“NYAIP”) § 18(4).

2. The insurer must return, from the canceled policy’s unearned premium, the amount paid by the premium finance agency, pursuant to NY Ins. Law § 3428(d). Further, the insurer must return the remainder, if any, to the producer that requested cancellation, as authorized by NYAIP § 18(4), because the insured’s check, which was deposited in the producer’s premium account, was dishonored by the bank upon which it was drawn.

In that post, I asked whether anyone could explain to me the "CPLR 325A-1" reference on page 2 of the revised rules. There is no such section of the CPLR. Attorney Tom Etzel commented that perhaps the citation was meant to refer to what was formerly 11 NYCRR 65.10(d)(5)(i).

I emailed Arbitration Forums' Tim McKernan, Manager of Member Training and Forum Rules, for clarification and heard back from him this morning, advising that the revised rules have been corrected and are again posted here.

As you can see, the CPLR reference has been changed to "[t]he appropriate arbitration filing must be made within 60 days of the date of final determination of the issue of coverage by the Court."

Sometimes, passions were too strong, convictions too deep, perspectives too contrasting to reach agreement on a call. Still, it was understood that unless the opposing team was being absolutely unreasonable or cheating, preserving friendships and, even more importantly, continuing the game took precedence over a specific play. After the proper amount of heated discussion had taken place, one of the player would finally extend the proverbial fig-leaf by offering his opponent a "do-over", as in "you can do it again."

The do-over was one of childhood's most powerful rites, for it exerted our dominion over the laws of space and time. The clock was rolled back, the game was restored to its exact status as before before the contested event and play was resumed. If the original play was particularly important and the second attempt was dramatically different (e.g. the player striking out instead of hitting a multi-base shot as in the original play), the do-over might be invoked again. This second invocation would give the team another chance thereby insuring that the universal forces of fair play were being righteously maintained.

Yes, it is with fond memories that we recall the do-over a divine method of resolution, and contemplate the untold blessings it could bring if it were somehow extended into our contemporary lives.

There are do-overs in the law. Motions to reargue. Motions to renew. Even an appeal, in a sense, can be a do-over. The plaintiff in this case was granted a do-over based on a material change in appellate decisional law.

Plaintiff sued her commercial property insurer, alleging that it breached her contract of insurance by failing to pay certain claims for losses arising from an armed robbery at plaintiff's jewelry store. In addition to claiming contractual damages (policy coverage benefits), plaintiff's complaint alleged and sought to recover consequential damages, including future lost profits and future sale value of the business. Initially, Charter Oak Fire Insurance Company, a Travelers company, successfully moved to dismiss plaintiff's consequential damages claim, and the Fourth Department affirmed that order in March 2007, based, in part, on its decision of one month earlier in Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 37 AD3d 1184 (4th Dept. 2007).

In February 2008, the New York Court of Appeals reversed the Fourth Department's decision in Bi-Economy and ruled that consequential damages may be recoverable under a commercial property insurance policy. Based on that reversal and change in the law, plaintiff then moved to renew her opposition to Charter Oak's original motion to dismiss her consequential damages claim. Based on the doctrine of "law of the case", Onondaga County Supreme denied plaintiff's motion, and plaintiff once again appealed to the Fourth Department, Appellate Division.

The Fourth Department MODIFIED the order appealed from to grant plaintiff's motion to renew and reinstate her consequential damages claim:

While the instant action remained pending, plaintiff moved, inter alia, for leave to renew her opposition to Charter Oak's motion to dismiss her claim for consequential damages, based upon the decisions of the Court of Appeals in Bi-Economy Mkt., Inc. and Panasia Estates, Inc. Supreme Court erred in denying that part of plaintiff's motion for leave to renew with respect to consequential damages based upon the doctrine of law of the case and instead should have granted leave to renew and, upon renewal, denied Charter Oak's motion. "[A] court of original jurisdiction may entertain a motion to renew or [to] vacate a prior order or judgment even after an appellate court has rendered a decision on that order or judgment" (Tishman Constr. Corp. of N.Y. v City of New York, 280 AD2d 374, 377). Furthermore, we conclude that, because "the analysis employed by this [C]ourt in the prior appeal no longer reflects the current state of the law, the doctrine of law of the case should not be invoked to preclude reconsideration of" Charter Oak's motion to dismiss plaintiff's claim for compensatory damages (Szajna v Rand, 131 AD2d 840, 840; see Foley v Roche, 86 AD2d 887, lv denied 56 NY2d 507).

The reference to "compensatory damages" in the last sentence should probably have been "consequential damages", and this decision portends similar motions to renew previously successful motions to dismiss consequential damage claims. When a court of higher authority has made a material change in the law, and even where the aggrieved party unsuccessfully prosecuted an appeal, the law of the case doctrine will not preclude that party from seeking to renew its opposition to the original motion.

If you were in the business of exterior painting and had a commercial liability policy that excluded coverage for bodily injury or property damage from "spray painting operations", would you expect that exclusion to apply to damage caused by the spray application of a protective sealant instead of paint? No, not if that was your weekend job and sat as a justice during weekdays on the Third Department, Appellant Division.

Nova Casualty Company insured a painting contractor, who was hired to apply a protective sealant to the exterior cedar wood siding of a customer's home. As the sealant was being applied, drop cloths were used to catch any of the solution that dripped during the application process. The drop cloths were then stored in an enclosed porch at the rear of the customer's home. Later, the home was significantly damaged by a fire that the homeowners claimed was caused by the spontaneous combustion of chemicals in the sealant that had collected on the drop cloths.

Central Mutual Insurance Company insured and paid the homeowners for the fire damage. It then commenced a subrogation action against Nova's insured to recover its claim payments. Nova agreed to defend its insured, but disclaimed indemnification coverage based on two policy exclusions: the first "bodily injury and property damage arising out of [s]pray [p]ainting [o]perations"; and the second for for any damage "to that specific part of real property on which work is being performed ... if the 'property damage' arises out of such work." Nova then commenced this declaratory judgment action, seeking a declaration that it was not obligated under its policy to indemnify or defend its insured in the underlying subrogation action. Defendants Central Mutual and its insureds successfully moved for summary judgment, and Nova appealed.

In AFFIRMING the lower court's award of summary judgment to the defendants, the Third Department ruled first that the spray painting operations exclusion was ambiguous as applied to the facts of the loss in question:

Initially, we note that to gain the benefit of an exclusion clause in an insurance policy, the insurer has the burden of demonstrating "that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case" (Continental Cas. Co. v Rapid-American Corp., 80 NY2d 640, 652 [1993]; see RJC Realty Holding Corp. v Republic Franklin Ins. Co., Utica Natl. Ins. Group, 2 NY3d 158, 165 [2004]; Frontier Insulation Contrs. v Merchants Mut. Ins. Co., 91 NY2d 169, 175 [1997]; Villanueva v Preferred Mut. Ins. Co., 48 AD3d 1015, 1016 [2008]). As for the particular provisions in question here, plaintiff argues that the policy exempts it from liability because it specifically excludes from coverage any "bodily injury and property damage arising out of [s]pray [p]ainting [o]perations." However, nowhere in the policy is the term spray painting operations defined or is it specifically stated that such an operation includes the application of sealants or other nontraditional paint materials. Here, the uncontroverted testimony established that Bennett and Pesano were not using a paint; instead, they were applying a product called "Cabot Clear Solution." Given that sealants, as opposed to paints, were not covered by the express wording of the exclusion, this clause, as it is applied to these facts, is, at best, ambiguous and the existence of such an ambiguity serves to bar its application to the facts as presented by this claim (see Villanueva v Preferred Mut. Ins. Co., 48 AD3d at 1016; Boggs v Commercial Mut. Ins. Co., 220 AD2d 973, 974 [1995]; General Acc. Ins. Co. v United States Fid. & Guar. Ins. Co., 193 AD2d 135, 138 [1993]).

Nova's insured had brushed as well as sprayed sealant onto the cedar shingle siding. The court also found that since nothing in the record supported a finding that the fire resulted from sealant that had been sprayed as opposed to brushed onto the siding, the policy exclusion could not apply.

Lastly with respect to the spray painting operations exclusion, the court noted that "[Nova] urges the adoption of an interpretation of this clause that, if correct, would have been applied to any work performed by [Nova's insured] on the [] home and, as such, would have resulted in there being no coverage under this policy. Such a result would have obviously been at odds with [the insured]'s 'reasonable expectations as a businessperson seeking insurance coverage for injuries resulting from the operation of his [painting] business' (Kramarik v Travelers, 25 AD3d 960, 962 [2006])."

The Third Department also agreed with the lower court's rejection of Nova's reliance on the policy's work product exclusion of damages "to that specific part of real property on which work is being performed ... if the 'property damage' arises out of such work." Noting that such a work product exclusion exists to exclude coverage for business risks, including claims that the insured's product or completed work was not that for which the damaged person bargained, the court held:

The [homeowners'] claim is not that they were damaged as the result of the quality of [Nova's insured's] work or that he misapplied the sealant to the siding of their home. Instead, their claim is that the home was damaged by a fire caused by the negligent manner in which [he] and his employees stored materials and equipment used on the job after the sealant had been applied (citations omitted). This exclusion is clearly not intended to exempt from coverage under a general commercial liability policy physical damage caused by the negligence of an insured; instead, it was designed to apply to those situations where coverage is sought "for contractual liability of the insured for economic loss because the product or completed work is not what the damaged person bargained for" (Hartford Acc. & Index. Co. v Reale & Sons, 228 AD2d 935, 936 [1996]). For these reasons, this exclusion does not apply.

Finally, the court also rejected Nova's argument that summary judgment was granted prematurely because Nova had not been given an opportunity to conduct meaningful discovery:

[Nova] not only has been on notice of the existence of this fire and the implications that it held for its policy since shortly after this fire occurred, it also played an intimate and important role in providing the insured with a defense in the underlying litigation. In addition, [Nova] has failed to identify how it, in the course of these proceedings, has been prevented from obtaining what it contends is relevant evidence on the issues that have been raised and resolved by Supreme Court in its determination of this motion for summary judgment (see Zinter Handling, Inc. v Britton, 46 AD3d 998, 1001 [2007]).

The reported decision does not provide or reflect any underwriting intent for the spray painting operations exclusion, leaving open the question of whether that exclusion was intended only to apply to overspray damage claims. Regardless, when an insurance policy uses in an exclusionary provision a non-standard term that is not defined, the chance that a court will find it ambiguous and interpret it against the insurer substantially increases. Such was the outcome in this case.

Welcome to Coverage Counsel, where we hope you will find timely and useful information regarding New York state and federal insurance coverage cases and issues.

Coverage Counsel is brought to you by the law firm of MURA & STORM, PLLC with a main office in Buffalo, New York. To contact us, call (716) 855-2800 or email Roy Mura, the editor of this blawg.

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